Policies against informality in segmented labour markets: a general equilibrium analysis applied to Uruguay

In this paper we analyze the impact of some policies against informality on the labor market, poverty and income distribution in Uruguay, using a general equilibrium model that considers a dual labor market segmented by skill, and microsimulations. We simulate two sets of policies: payroll tax cuts and increased enforcement in the informal sector. Both sets of policies are effective in reducing informality. Payroll tax cuts on unskilled labor increase informality among medium-skilled workers, but in spite of that they are successful in reducing poverty and improving income distribution. Enforcement policies have a negative impact on wages, especially for unskilled workers. The net effect on poverty is two-sided: on the one hand this policy promotes an increase in poverty as a consequence of wages falling, but on the other hand poverty falls because the formal demand for labor increases.